Ricardian Economics and all that...!

Thursday April 18 2019

 

Today’s piece was prompted by the historical fact that a “brilliant Economist” of yore rarely mentioned/heard, David Abraham Ricardo, was born on a date like today’s 247 years ago.

Born in London, England, on April 18, 1772 – only to ‘die a slow, painful death from severe (unnamed) illness’ at 51 years of age on September 11, 1823 – David Ricardo was the third of 17 (!) children of a Sephardic Jewish family who had just then relocated to Britain from the Dutch Republic, modern-day The Netherlands!

David Ricardo had a rather adventurous early life. His father Abraham employed him in his business as stockbroker of the London Stock Exchange when he was only ‘14 years young.’ From that time, young Ricardo acquired exceptional acumen in business and economic matters – eventually amassing a fortune of some £1 million dealing in government securities as a “stockbroker and loanbroker.”

This ‘allowed’ him to retire at the relatively young age of 42 years to become a member of the British Parliament.

During his brief life this side of Heaven, Ricardo’s contributions to Economics became known as ‘Ricardian Economics,’ embodying theories he propounded after reading, at age-27, ‘An Inquiry into the Nature and Causes of Wealth of Nations’ by Adam Smith (popular as ‘The Wealth of Nations’ for short).

In due course of time and musing, Ricardo came up with economic theorizations that were published in 1817 under the title ‘On the Principles of Political Economy and Taxation.’ The theories included ‘Ricardian Socialism,’ ‘Ricardian Equivalence,’ ‘Comparative Advantage,’ the Labour Theory of Value,’ ‘Law of Diminishing Returns,’ ‘Economic Rent,’ the ‘Iron Law of Wages’...

Merriam-Webster defines the Iron (or Brazen) Law of Wages as “a statement in economics (that) wages tend to fall to the minimum level necessary for subsistence” – and all attempts to improve the real income of workers were futile! The theory of ‘Comparative Advantage’ in effect stated that manufacturers should specialize in the production of goods in which they not only have an ‘Absolute Advantage,’ but also a ‘Relative Advantage’ over other manufacturers in order to promote their benefits from trade. “For example, a mutual trade benefit would be realized between China and the UK by China specializing in porcelain and tea production, while the UK concentrated on producing machine parts...” Sheesh!

‘Absolute Advantage’ is, of course, the ability of an individual, a company, country or a zone to produce/provide goods and/or services at a lower cost per unit than another entity that produces the same goods or services. In other words: it’s the ability of an individual or a group to carry out a particular economic activity more efficiently than another individual or group.

The concept of ‘Diminishing Returns’ postulates that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, etc.) remain constant, the output per unit of the variable factor will eventually diminish.

‘Ricardian equivalence’ is an economic theory suggesting that when a government tries to stimulate its economy by increasing debt-financed government spending, demand remains unchanged.

But, are the Ricardian pontifications two-and-a-half centuries ago relevant today? Are they...? I ask you... yes; YOU! Anyway; happy 247th birthday, David Ricardo – wherever you are!

Advertisement